Tariffs, the Dog That Barked (a Lot) but Didn't Bite?

Perhaps the most widespread question for investors is why US economic activity has not weakened despite the magnitude of tariffs imposed since April. While reasons come to mind (weaker dollar, low gas prices, tax bill), a simpler explanation may be a lag between the announcement of tariffs and their economic impact. Despite uncertainty, we believe there are some conclusions that can be drawn based on the factors supporting growth as well as the example of the 2018 tariff war. These conclusions help frame our investment outlook for the second half of 2025.

• We expect economic growth to be lower than 2024 but still positive as a weaker dollar and lower taxes help offset tariffs somewhat. However, risks to growth are more to the downside than upside.
• In this economic scenario, we believe corporate earnings growth will also likely slow but remain positive, historically a good environment for credit markets. Tax legislation should be a tailwind, while dollar weakness should support companies that generate revenue overseas.
• Tariffs will likely provide a one-time inflation impulse, but more so for specific sectors. In our opinion, the impacts will be temporary as was the case in 2018.

Also in today’s newsletter:

• Emerging Market Debt: The backdrop for investing in EM remains supportive given stable-to-improving fundamentals and countries’ ability to implement counter-cyclical monetary policy. We believe that institutional investors seeking total return would most benefit from thinking beyond the benchmark and adding strategies such as EM Frontier and EM Local Currency.
• Investment Grade: We have previously discussed the importance of tactically allocating capital, and the quarter brought such an opportunity – our investment team identified undervalued securities in April and then sold into strength in May/June.
• High Yield and Bank Loan: After an intense but short-lived sell-off in April, the market discounted tariff bluster and embraced a soft-landing scenario. High yield and loans rallied aggressively through the quarter, and we are looking to reduce risk at these higher prices.